China’s Currency Goes Beyond 7!
I expect higher stock prices ahead, thanks to one bullish indicator I follow with a perfect track record of success.
But I also expect stocks to remain volatile near term for a variety of reasons, including: weak economic data, trade war tremors and poor seasonality over the next several months.
To determine which way stocks are likely to move next in this turbulent environment, keep your eye on a few simple indicators.
No. 1: The VIX
One handy indicator to measure risk is the stock market’s fear gauge, the CBOE Volatility Index (VIX). Volatility spiked higher the past two weeks with VIX climbing to nearly 25, up from just 12 at the end of July.
VIX has pulled back a bit since, but still hovers around 20 as this article goes to press. If the fear gauge makes a new high above 25, watch out below.
But there’s another, even more timely risk indicator investors should watch even more closely right now.
No. 2: Currency Wars
That more timely risk indicator is the U.S. dollar — Chinese renminbi exchange rate.
As you can see in the chart above, the Chinese deliberately devalued their currency in 2015 and ’16 against the dollar, sending the exchange rate spiking higher from about 6 renminbi to the buck to nearly 7 to the dollar by 2017. Not surprisingly, the stock market went haywire during the devaluation. The S&P 500 suffered back-to-back declines of 15% and 13.5%.
The Chinese currency strengthened in 2017, and U.S. stocks surged higher. Then the trade war with China began last year; no surprise China’s currency weakened again. And once again, U.S. stocks plunged in February 2018 and again from October through December last year.
In response to the Trump administration’s latest threat to slap a new round of tariffs against Chinese goods on Sept. 1, China again fired a warning shot by letting the value of its currency slide against the dollar, with the exchange rate breaking above 7 to the dollar for the first time earlier this month.
It’s no surprise that U.S. stocks have once again turned volatile. If China’s currency continues to slide in value, market risk could intensify. According to Wall Street estimates China’s currency would need to fall to nearly 8 to the dollar in order to offset 25% tariffs on Chinese exports to the U.S.
Beyond 7 is bad enough, but if the renminbi goes beyond 8, look out below.
What Can You Do?
Consider securing a basket of high-quality dividend stocks for one thing. Blue chips very often outperform growth stocks during periods of volatility. Or at least they take lesser losses.
Plus, while you wait for markets to stabilize you can collect quarterly cash payments whether the stock is up or down.
For a single stock play, consider the ASA Gold and Precious Metals ETF. This ETF is on a tear, piggybacking the recent rush into gold as folks hedge against geopolitical tensions.
You can read more on why we love ASA here. [Charts]
More updates to come.
Here’s to growing your wealth,
Chief Income Expert